Lower Than Expected Losses on Credit Cards Could Boost Banks' Profits

by Mercator Advisory Group 0

Credit cards are being noted as a potential driver of bank profits—not because of their growth, but because their losses are lower than budgeted.

From a Reuters article:

With lower credit card delinquencies, banks can dip into money previously set aside to cover bad loans, helping second quarter profit. In a quarter where banks suffered from low rates and still-tepid loan demand, banks need all the help they can get.

For the six biggest U.S. credit card lenders, including JPMorgan Chase, Bank of America Corp, and Citigroup Inc the average delinquency rate is down to 2.35 percent from more than 6 percent in early 2009, according to Barclays Capital.

Clearly, the persistence of a long period of tight credit policy is driving the unusual results. The slow pace of recovery has driven issuers to remain cautious in their credit policy and to delay the addition of higher risk accounts to their portfolios, although that is beginning to change slowly.

For a long time, credit card delinquencies correlated roughly with unemployment, which was 8.2 percent in June according to a report on Friday. That relationship has broken down in recent years.

In normal credit cycles, lenders would respond to improving credit performance by courting new customers and making more loans. But banks are reluctant to pursue consumers with weaker credit now.

Now nearly 60 percent of new cards are being issued to prime borrowers, down about 10 percentage points from the strictest periods three years ago, but up from about 42 percent in the lenient periods of 2007, according to Equifax.

Click here to read more from Reuters.

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